How to trade like a retarded hedge fund manager

Theme: One way of investing (portfolio composition, and averaging in and out of long term holdings)

Alternative theme: There is no secret sauce in investing, so go ahead and try your own.

Even a retard can do it (apparently, given my career). On the other hand, I have all but given up on the financial markets, but there is no reason why you shouldn’t at least give it a go. Maybe you’ll like it, maybe you’ll be good at it.

Length: Not very long

Have you noticed that “trader” and “retard” are anagrams?

It’s not a coincidence I’m a retard cum trader; after my stints as a broker, an analyst and a portfolio manager.

Given my experience from all sides of the market, as well as being a coder, a natural sciences nerd and eventually a finance major, how do I approach the financial markets?

You took money from the many faced market

The most important thing to understand is that investing and trading are more about psychology (your own psychological resiliency to stress) than numbers. Guess how long it took my Aspberger-ish, scientific, coder, not to mention business school brain washed, mind to reach that conclusion…

The second most important thing is that investing is about minimizing losses, not maximizing profits

Your worst enemies are hubris, greed and envy. Your greatest assets are patience and agility of mind (the willingness to disprove your own theses)

That said, what is my current approach to investing?

Well to make it really tangible, my entire asset portfolio looks like this:

Real estate (apartment)

Various private Swedish companies

Private Canadian gold royalty company

Listed assets (Bear certificates and stocks)

Cash and loans

Debt: 0

It’s kind of a retard’s version of the Quattro Stagione portfolio I often advocate:

It’s one part real estate and living space (no loans), one part high risk private equity investments in software, services, healthcare, retail/fashion etc., one part physical gold, one part publicly traded securities (currently 80% bear certificates and 20% stocks [small cap, high risk and/or secular growth]), and finally one part cash and lent out money to friends.

You could compare it to a more traditional Quattro of Gold/real estate, Stocks, Corporate bonds and Government bonds, although there are many ways to put together an investment pizza. Also note that, in effect, my public and private stock holdings are more or less hedged with bear certificates (the Swedish instrument XACT BEAR with -1.5x leverage to be precise).

You took money from the many faced market, money that wasn’t yours to take. Now a debt is owed

The rationale behind my portfolio composition is:

You never know what’s going to happen, that’s why I choose to be diversified.

Going back to square 1 is almost unacceptable (albeit would be a hefty BOOH!), so I make sure to own my living quarters and with no debt whatsoever

The current monetary and fiscal experiments are unprecedented. It is thus more likely than not that we will eventually experience an epic record setting crash, and financial re-set. Hence the gold, physical gold.* When this goes south in earnest, cash and paper gold will be frozen, confiscated, substituted and in any case be practically worthless. The dice is thrown in this matter, meaning I can’t really get out of my physical gold venture for a few years. Good, one less thing to think about. Now I can turn my attention to oil again, which might be a good buy in a few months.

You never know what’s going to happen; that’s why I own stocks at all. I focus on small and micro caps, unloved deep value/secular growth, or hopium stocks with little or no revenues but theoretically huge market potential. My choice of stocks are rooted in a sort of surrender, where markets in general, and large caps in particular are grossly overpriced. Hence, I invest in stocks without valuation :p

I’m a kind spirit and if I can help friends in need I lend them money (on paper, it’s for apartments, houses and cars, but in practice I suspect I’m financing part of their investment portfolios, since they actually do own stocks at all). I do charge interest though. I also keep a little cash lying around, maybe too little right now…

* please note, that back in early 2015 I was speculating in paper gold (ETFs like GLD and GDX, among others). In July 2016 I have sold all my ETFs and bought shares in a private Canadian company that owns royalty streams in gold mines, i.e., holding the rights to delivery of physical gold directly from the mines. That is several steps closer to actually holding the coins and bars myself.

There really is no need to talk about how I manage most parts of my wealth, so let’s just focus on my publicly listed stocks (which to be clear make up but a few per cent of my wealth).

I own stocks in the following companies of which 5 out of 7 have less than 35m USD in market cap.

I don’t recommend anybody copy my portfolio of stocks. They are high risk, volatile, and not least most likely very vulnerable in a stock market crash and market liquidity crisis.

In any case, I am currently (July 28, 2016) thinking about taking my profits and selling off all of my publicly listed stocks. Then again, you never know…

Opus is a case in point on how I typically handle a share holding

I bought my first shares at 7.10-7.30 SEK in January 2015, being adamant that I expected it could fall by 50% in value in a stock market crash. Instead I rode it to 10.70 and down again without doing a thing.

I then added significantly at 4.40-5.50 SEK between August 2015 and February 2016

Then I traded parts of my holding a few times, making some 0.40 SEK per trade, selling at three different occasions at 4.87-4.97 SEK, and buying it between 4.37-4.62 SEK; all based on gut feeling, on large unwarranted daily/weekly moves and an overarching strategy to stay invested in Opus for the long run. I was aiming to lower my average purchase price, as well as stay up to date with the stock.

I had said publicly that I would buy with both hands if/when it fell to 4, which I fully expected it to do in the anticipated stock market rout.

Well, the market didn’t crash…, but Opus did. Consequently, in the first half of May 2016, I picked up significant amounts of stock at 4.37, 4.07 and 3.98 SEK respectively, bagged a 0.10 SEK dividend, and sat back and waited. For what? For an opportunity to either buy more even cheaper or to sell some of the excess holding I had accumulated.

In June and July 2016, I sold Opus stock on 10 different dates at prices ranging from 5.00 to 6.40 SEK, thus taking my holding down to a little below my target exposure.

My average purchase price is 4.87 SEK, and I freely admit that the first marginal profit taking at 5.00 SEK was somewhat of a panic relief sale after buying a little too much around 4.00 SEK. Hey, I’m only human!

Now, I want the market and not least Opus to fall again. If not, I’ll look elsewhere for value. I still own Opus stock, but long term I want to own more. On the other hand, the run-up from 4.00 to 6.50 doesn’t really make sense. As you can tell, I’m conflicted at this point and share price.

No, I won’t go through the actual case for Opus. Do your own homework. Trust no one.

Silly me

My strategy can be summarized as follows

Find a stock (several in parallel) that you want to own [this can be tricky of course, but this post is not about fundamental analysis or stock screening. This however, kind of is]

Buy a little right away if it’s cheap enough (again, it’s up to you to define ‘cheap’)

don’t buy all you want, unless it’s a certified steal, or the technicals look perfect

Buy more if it falls. Keep buying if it keeps falling

Trade a little around the position if you think the trading patterns allow for it, i.e., sell some of what you buy, even if it’s below your average purchase price and your value target, and buy whenever it falls by a lot.

Put in shamelessly out of the money long term buy and sell orders in the market. Sometimes you just get lucky in a choppy, algo-beset market. I’ve often come home from the gym or a dog walk and found new, welcome, transactions on my account.

Sell to below your desired position, if the stock appreciates a lot for no apparent reason

Sell all; if the stock is no longer a fundamental Buy, get out altogether

Too high stock price

Falling fundamentals

It’s so elementary I actually feel silly for spelling it out, but maybe, just maybe, you or a friend of yours could get inspired by exactly that. Unless you’re aiming to be a day trader, investing definitely doesn’t have to be any harder or more complicated than the above.

Silly

Actually, it should be less complicated. You should be able to just buy and hold the right assets for several years at a time, instead of wasting valuable time trading stocks back and forth like a rodent in a cocaine or pleasure electrode experiment. However, at this point in the economic and market cycle hardly any public investment makes sense, and that makes it difficult to buy anything for the long term.

The important thing to remember here is, that at every price point I’m buying, I’m ready to hold the stock forever, as long as fundamentals don’t change radically. I only buy at prices I think will produce a long term satisfactory return, and I sell to either make room in the portfolio, reduce risk, or if the price has risen above the point where I wouldn’t buy the stock (due to too low long term returns).

A trader (human or AI/algo) could buy or sell at any price or valuation points.

What works and what doesn’t

I have kind of given up on markets, on what works and what doesn’t.

This whole QE era apparently doesn’t agree with me. That’s one reason I finally left the hedge fund industry, just as I left the sell side in Q1 2000 partly because of the ridiculous IT bubble.

In the year 2000, apart from being tired of being an analyst, I just didn’t want to be associated with Buy recommendations on overvalued stocks. And had the bubble kept inflating, I would have been left standing on the station anyway, with my Neutral/Sell recommendations.

In 2014, after 14 years at a hedge fund, it was much the same story again. I couldn’t find enough worthwhile investments on the stock market, and I would have made a fool of myself had I been short. That, and I had had enough; and had enough ;)

OOU!

Only half-joking, I used to say, I could just as well be one step behind as one step ahead the markets and do equally well. Talk of losing one’s mojo…

Anything works?

In a similar vein, today I’m mulling the idea of “anything works”:

Firms like Goldman Sachs and McKinsey famously work according to the Up Or Out model. OOU means you are either rising in the ranks or being pushed out a window. Oou! They hire a lot of talent and simply see who survive. It’s actually a kind of Ponzi scheme, but all the losers have gone on with their lives (and joined the zombie crowd forever mumbling “I used to be at Goldman. When I worked at Goldman…”).

You can apply the OOU model to stock market investing as well. Several very successful hedge funds simply allocate more and more capital to whatever manager is on a winning streak, while losers get less and less and are eventually kicked out. Algo funds do the same, albeit with their models instead of human managers.

In the game of plants

you either win or die

And then there are the infamous examples of ordinary plants doing the trading, based on water and sunlight feedback on winning trades.

Howard Marks talks about first and second level thinking on the markets, where a first level thinker buys a stock after a strong report and a second level thinker sells the same report based on it being strong, but weaker than expected. A first level thinker would also say, money is being printed and interest rates are low, let’s buy stocks today too (since that 1% rate differential per annum [!] is worth at least 1% per month)…

Apart from the fact that first level thinking usually works fine in bull markets; these days, I think it works just as well as anything else, unless or until it doesn’t.

You could use first level thinking (or second level if that’s your game) on momentum, on P/E, on P/S, on growth, on Philly Fed, on ISM. If it works it works. If not, try another basis for your trading (or “investments” if you want to call it that).

It’s not really that I’ve given up, gone out to lunch or done a Hugh Hendry. I’m just saying that at this point in time; with synchronized abysmal global macro, the turn of a multi-generational debt cycle, and among the highest, if not the highest, stock market valuations in history, all coupled with the positively craziest monetary experiment ever; it’s futile to say anything firm about the financial markets.

It’s all in flux. So why not try whatever? Personally, I think that’s a strategy doomed to fail, but hey, you’ll be in good company as you all took money in the short term from the many faced market.

Just make sure you go big enough to be bailed out.

Before I go I just want to mention one more “adaptive” approach to markets that just might work, just as anything else might work:

Among other things, their investment strategy has zero overnight risk, use actual trading pit behavior as the base for their trading strategies, and here’s the kicker, utilize chaos theory and Strange Attractors à la Lorenz, to identify when a model is going into or out of a sweet spot of high correlation and predictiveness (e.g., think in terms of the bundles in a 3-body animation chart).

What little I understand from my morning walks with him, it sounds convincing and perhaps a little less risky than pure momentum+OOU.

The chart looks impressive, but unfortunately AlgoQuant only has 7 months of history. I’m enticed nevertheless, although I haven’t gone into any detail of their set-up. As usual this is emphatically not a recommendation (see disclaimer page)

Summary

There is no (one) secret to investing. Anybody can do it. Experiment and see if you find a way. Seth Klarman’s book, however, should be a mandatory read before beginning.

admin

Post navigation

21 Comments

What is your take on options trading? I guess one hindrance is in Sweden (and most non-US markets) options are not very liquid compares to US markets.

I’ve had fairly good success in a short stint of options trading (selling premium, not buying). I quite like it for a couple of reasons:
– you don’t have to be right, just not very wrong in the timeframe for expiry.
– exits are easy: expiry or buying back the option at some preset level of managing winners.
– can be done in any market (overvalued as now), with an optional directional bias.

Tastytrade have done some pretty interesting content on the subject, though I’ve found some flaws in some things they claim to have researched in running my own backtests.

I do wonder if selling naked calls is as dangerous as people believe?
Here’s some things I’ve pondered on:
– risk skew is more important. Markets rarely crash upwards. Risk of selling puts against things you don’t actually want to own might be higher in this regard (gold and a few other classes with positive skew excepted).
– given likely risk of upwards crashes being low, it’s possible to close out positions that move too far against you (avoid “hot” stocks like TSLA et al) as long as there is room & time to expiry.

The issue of what side the greatest tail risks lie on are something that fascinates me..

Thanks for your up to date take on your investment decisions. I tend to agree with you that the markets are more likely than not due for substantial setback, however as always, the timing is the real issue.

With regards to the long gold idea, I will admit I am heavier than 20% of my portfolio, maybe as high as 40% at last check! This is not only physical but some miners as well, and the miners have more than made up for the losses in my short book this year. While physical is safest, I like the miners as they own physical as well, albeit in the ground. Yes, governments will raise taxes on mining companies and even outright confiscate them if it’s attractive enough, but the key is again the timing and to be out before any apocalyptic scenario. It could be a very nice ride until that point.

Holding gold ETF’s and mining stocks IS NOT holding physical gold. If your purpose is to speculate on gold going up or down… fine. If your purpose is to hedge against a major currency event (ie what’s happening in Venezuela now) — bad choice. I think you may be a bit confused, because you mention confiscation, which is related to currency events. The ETFs would certainly be the first victims of any confiscation.

Personally, I have coins in a safe deposit box. I would use ETF’s/stocks/futures for trading only. Perhaps you could clarify your goals here.

Second, I always cringe when I hear someone mention selling when fundamentals change for the worse. Aren’t the fundamentals highly managed by the companies to paint a rosy picture? Also, you mention trading is mostly psychology. This suggests using technical analysis. So, again you seem conflicted. You deride technical analysis one day, then suggest it is important (ie psychology), but also refer to fundamentals which are highly suspect data points.

I’m guessing comments are ignored. However if you find any of this interesting, I’ll be happy to share a book on hedging that sounds a lot like the walks with your friend.

Comments are never ignored, no matter how poorly formulated or misinformed :D

Holding ETFs is NOT physical gold. Read again. However, I guess you’re referring to an 18 months old article, which was written at a time when I did hold ETFs (which I don’t do now and which I clearly specified in the article). At that time I also specified it was pure speculation on paper gold. Please read more carefully next time before trolling.

In case you didn’t know, ETFs are the first to 1) be suspended 2) substitute your gold claims for paper money 3) be confiscated :D :D :D (doing some trolling back on you sir, just because you read my article like the devil reads the bible)

As I said, I have sold all my ETFs in order to focus on physical gold in an effective way, and been involved this summer in setting up a royalty stream company that invests in the rights of physical gold production in smaller and junior mines. A few steps closer to physical as the company and I can choose physical delivery directly from the mines. So, yeah, it’s not coins even if I think everybody should have a few coins at home as well. A safe deposit box is about as retarded as ETFs by the way, not that being retarded has ever stopped me.

Fundamentals = interest rates, sales, inventory, COGS, wages, tax rates, and so on and on. IF the price v.s fundamentals picture changes I sell or buy accordingly. In my world there is NO OTHER way to do it (unless you’re a momentum or algo trader or similar). And, no, companies cannot manage fundamentals interpreted that way (i.e., the fundamentals :)

Psychology does not imply technical analysis. What I was talking about is YOUR psychology, i.e., your own mental stability and resiliency; whether you personally will be stressed into certain decisions or not. Technical analysis is implied if a lot of OTHER people share a common psychological make-up, or if a lot of algo funds create certain recurring patterns. On that note, isn’t it ridiculous how some people use several years old technical patterns on today’s market despite all the underlying changes in terms of e.g. computer trading and QE?

I agree that you can’t trade on fundamentals. On the other hand you MUST invest on fundamentals (all the things that combined create value, from the directors, to strategy, to macro developments, to input costs, inventory turnover, taxes, competitors, substitution etc.). I guess you don’t see the difference and therefore think I’m conflicted.

Still not sure how a royalty streams co would be considered physical. The royalty streaming companies have no claim to the gold that is dug up, only a claim to part of the revenue. Is your co structured differently than other royalty streamers? If so, interesting.

Thanks for the reply. Was not intending to be anonymous… unfortunately hit send before filling out all the fields :)

I see now that you mentioned selling your gold ETFs, so I apologize for the quick reading around that.

After your reply, it seems we agree on most points. I was really seeking to clarify and understand, rather than troll. You do use fundamentals and technicals in limited ways, and understand the limits of each.

I do have a cynical opinion of hedge funds here in America. It seems all they do is trade the same few momentum stocks. The word “hedge” just means long/short. They rarely use correlation correctly, or care that in stressful times nearly every stock correlates in the downward direction. The simple Quattro Stagioni you recommend goes well beyond that, and is something anyone can do for themselves.

More advanced readers may enjoy a book called “Following The Trend: Diversified Managed Futures Trading”. The author Andreas F. Clenow shows how he is able to deduce the management style of some well known hedge funds. He demonstrates this by taking a mechanical trend following strategy and simply tweaking the risk levels (leverage and stop loss). It is actually a very detailed description of how to develop the trading strategy for a new fund. Not practical for individuals, as the strategy involves active trading in nearly every futures contract available internationally (with appropriate liquidity).

You are right that we are in a time where its no longer possible to go long-only and look like a genius works. I guess we can thank the “long only herd” (reference to your book intended) will have a hard time moving forward. Smart money is hard but still doable if you know what you are doing. We are lucky to have the amazing Luis Recabarren with us.

Actually the 18.1% YTD is using only using our standard boring algo day-trading strategy. Dynamical phase space correlations is still in development. You do not have to be an astromathematician to make money, but a scientific and agnostic approach is a good start.